Difference Between Equity And Derivatives
- 24th July 2025
- 10:30:00 AM
- 5 min read
Are you confused between investing in equities or derivatives? Well, understanding the key differences between these two investment options helps you manage your finances and gives you the potential to earn higher returns.
With investor accounts reaching 22 crore in April 2025, the Indian securities market is skyrocketing. This creates an urgency among investors to understand diverse investment concepts.
This blog analyses the differences between equity and derivatives and suggests which one is better for you.
Equity vs Derivatives: 6 Key Parameters That Set Them Apart
Equities are stocks or shares that represent ownership of a company. On the other hand, derivatives are contracts that derive value from underlying assets, such as stocks, commodities, or currency pairs.
Here are the 6 differences between equity and derivatives based on numerous parameters:
| Parameters | Equity | Derivatives |
| Purpose | Long-term investment option for growth and profitability | Short-term purposes like hedging, arbitrage, and speculation |
| Risk | Less risky since it is limited to the decrease in stock prices | Highly risky due to the usage of leverage and market complexity |
| Returns | Generate income from dividends and offer steady returns from possible capital appreciation | Generate income from changes in the underlying asset’s price |
| Investment Tenure | Can be used for both long- and short-term investment | Mainly used for short-term hedging and speculation since they have a specific expiry date |
| Leverage | No involvement of leverage, but investors may take it separately | Often involves leverage, which means even small market movements in the underlying asset may lead to significant losses or gains |
| Profit Timing | Profits are revealed when the asset price increases above the purchase price | Profits are revealed when the asset price goes in a predicted direction |
Understanding Equity
When you purchase equities, you become a partial owner of the company. Each stock represents one unit of ownership. For example, if a company has 10,000 shares and you own 100 of them, you effectively own 1% of the company.
Equity investors may also receive dividends, a share of the company’s profits distributed to shareholders. Additionally, depending on the type of shares held, equity holders may gain voting rights, such as the ability to vote in the board of directors’ elections.
Understanding Derivatives
Derivatives do not provide ownership of the underlying asset. Instead, they allow you to speculate on price movements without actually holding the asset. For example, a derivative contract can enable you to buy a stock for INR 100 after one month, even if its market price rises to INR 150.
There are various types of derivatives, with futures and options being the most widely used.
Options grant the right, but not the obligation, to buy or sell an asset on or before a specified expiry date. In contrast, futures come with a binding obligation to buy or sell the asset at the agreed-upon price upon expiry.
Download the PL Capital Group – Prabhudas Lilladher application and open a Demat account for free to invest in equities. Additionally, PL enables you to open a trading account with zero maintenance charges, which can help you trade derivatives.
Equity vs Derivatives: Which is Better for You?
Choosing between equity and derivatives depends on your risk appetite, financial goals, and market experience. Both have unique advantages, but understanding them is key to making the right decision.
You must invest in equities if you:
- Looking for long-term ownership and possible dividend income
- Want to have a say in the company’s decision-making process
- Want to keep your investments for a long time
- Have a low risk tolerance
On the other hand, derivatives are suitable for you if you:
- Want to hedge against certain risks or bet on short-term price fluctuations
- Are at ease with the possibility of increased profits or losses, as well as leverage
- Want to use options, futures, or other derivative instruments as part of your trading strategy
- Have a high risk tolerance
Final Thoughts
Understanding the key differences between equity and derivatives is crucial to have a better grasp of the financial market. You can make better decisions while investing in these securities. Based on your risk tolerance and investment options, you must choose any one between equity or derivatives.
Using the PL Capital application, you can invest in both equity and derivatives with ease. With the portfolio management services offered by PL, it will be easier for you to make a perfect proportion of equities and derivatives in your portfolio.
Frequently Asked Questions
1. Do derivatives carry more risk than stocks?
Yes, derivative trading without a hedge is riskier than equities. However, in some cases, derivatives also offset your risk in the equity market.
2. What is the difference between equity and derivatives?
The major difference between equity and derivatives is that equity represents ownership in a company and its shares, while derivatives are contracts that derive their value from an asset.
3. How are equity derivatives settled?
Exercise settlement in derivatives entails the cash settlement procedure. It is completed by either crediting or debiting the relevant clearing members’ clearing accounts with the relevant clearing bank.
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Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. It is based on several secondary sources on the internet and is subject to changes. Please consult an expert before making related decisions.
